Finance
Here’s How You Might Be Saving More in Your 401(k) – Without Even Realizing It
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Employers are increasingly automating how people save in their 401(k) plans through a mechanism known as automatic escalation. This feature automatically raises workers’ savings rate each year, often by 1 percentage point at a time up to a cap. The goal is to help boost savings when workers may not take action on their own. However, many people may not even realize that their savings rate is being increased, as the amount of additional money coming out of each paycheck is often indiscernible.
In an ideal world, workers would be saving at least 15% of their annual pay in a 401(k) plan, including both their own contributions and employer contributions like a company match. Factors such as age and outside savings may impact the ideal savings rate. Automating savings through features like auto-escalation makes sense philosophically, as the ultimate goal is to encourage people to save as much as they can for retirement.
Automatic enrollment, where employers divert a portion of workers’ paychecks into a 401(k) if they don’t sign up voluntarily, has become more widespread along with auto-escalation. In 2022, about 64% of companies with 401(k) plans automatically enrolled workers, with 78% of them also automatically increasing workers’ savings. Most plans raise savings rates by 1 percentage point a year up to a certain cap. Employees have the option to opt-out of the automatic savings arrangement.
However, many companies are hesitant to add auto-escalation due to concerns that it may place too much financial burden on workers. Only 40% of 401(k) plans automatically escalate savings for all workers, with 12% doing so only for under-contributing individuals and 26% making it a voluntary choice. The majority of plans cap automated worker contributions at 10% or less of annual pay, but workers can choose to set their savings rate higher voluntarily.
Overall, automatic escalation is a beneficial mechanism for helping workers save more for retirement without having to actively make changes to their savings rate. While some may not realize that their savings rate is being increased automatically, the goal is to encourage individuals to save as much as they can for their retirement years. The trend of automating 401(k) savings through features like auto-escalation and automatic enrollment is expected to continue, helping more people build a sufficient nest egg for the future.
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